A question for all you accountants

[Stu160]

Why do you have to pay corporation tax on depreciation?
I have had it explained to me that because we claimed the capital allowances in the first year, it's now due to pay tax on?
How can you pay tax on money that your company has lost?

Stu

[campbell]

Seems odd.

Calling Dom!!

[graeme]

Your company hasn't "lost" the depreciation as such. The depreciation represents the value your business has extracted from the asset this year. That's why it's on the balance sheet, not the P&L. Think of that value you've had from the asset being taxable and it starts to make sense. Sort of.

Your depreciation isn't usually charged all in one year. You spread it over a few years depending on asset type. But it can be beneficial to claim the full value of the asset against the Annual Investment Allowance in year 1, which would more than offset the taxable depreciation in year 1, which is probably why you didn't pay tax on depreciation in the first year. But in year 2 you have no further capital allowances to offset against the depreciation charge, making the full depreciation charge for that year taxable.

You could have chosen to claim the capital allowance over a longer term instead of the full asset value against AIA, and then offset some depreciation each year (I think). I don't know when it would be best to choose which approach (I'm sure the SE accountants can advise) but even still the allowance would certainly be less than the depreciation charge, so you'd still have a taxable difference at some point.

(I'm not qualified to answer; that's just my understanding in case the accountants are all asleep )

[alicrozier]

I'm not an accountant but as I understand it...
The capital allowances for an asset can be offset against profits to reduce your corporation tax bill. The allowances are only to the value of the asset and only once to use (cake and eat it). I think there is flexibility as to when the allowance is taken but if all used in the first year then can't be used to reduce tax bill in a subsequent year.
It's not like your paying tax on depreciation, just already used it all to get tax relief in a previous year.

So you've obviously made too much profit if claimed all the capital allowance in the first year.
V6 is not a depreciating asset btw, despite plummeting values since BigD bought one.

[campbell]

Lol

[BigD]

V6 is not a depreciating asset btw, despite plummeting values since BigD bought one.

How rude!

[RDH]

An accountant here...
Pretty much what Graeme and Ali have said.

For Corporation Tax purposes you take your profit and add back the depreciation which is dealt with for taxes separately.

Say your profits are £900 and within that you've charged £100 of depreciation. You add back the depreciation so your taxable profit is now £1,000.

However, you also get Capital Allowances for capital assets ( lets ignore V6s and other cars for the moment)
Say that £100 depreciation is for a £500 lathe or some other machine, you'd get your tax relief via Capital Allowances, normally at 18% each year, £90 in the example above. (sometimes it's 100% relief if it's a qualifying asset- your advisor should be able to tell you)

In the above example, you'd take the Capital Allowance of £90 from the £1,000 meaning you'll pay CT on £910.

You get the same tax relief, just over a different period. You'll only get the relief once.

PM me if you want me to talk you through it.

Cheers
Rob


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[Stu160]

Thanks for all your replies, and just confirms as it was explained to me. Just wanted to make sure.

That's what I get for looking at something I don't understand . I will just stick to machining cutting edge precision components for satellites in future.

Cheers, and thanks for using the V6 as an example of depriciation.

Stu